15 Oct STIMULUS AND CHANGE
The indices declined after Treasury Secretary Mnuchin stated that it would be difficult to get a stimulus deal done before the election. Bloomberg notes however, the inverse of the vast majority of 2020, the typical stock was up yesterday, noting that at one time yesterday 70% of the companies in the S & P 500 posted gains.
The discrepancy between the mega sized technology companies that dominate the indices and the typical S & P 500 company is widely documented and discussed. Most believe it is not a question as to if but rather as to when there will be reversion to the mean. It will occur after everyone is convinced that one will not occur.
Radically changing topics, most will agree voter turnout is a significant variable in determining the outcome of the election. Approximately 138 million or 55.5% of voting aged population voted in 2016. In 2012 54.9% voted and 57.1% and 55.7% voted in 2008 and 2004, respectively.
I think it is noteworthy the 2008 election had the greatest turnout since the 60.7% turnout of 1968.
Data states as of September 21 the voter registration rate is down 38% as compared to 2016. How significant is this data point?
The media is adamantly stating Biden will be elected and the odds of a blue wave are rising. Will 2020 be a greater surprise than 2016 causing all to further question the reliability of the polls and the objectivity of the media?
How does this relate to the market? Everyone is convinced of the invincibility of five or six companies that dominate the averages, believing gains will last into infinity. As noted many times I cannot reconcile the statement that a $2 trillion company is a growth company. The company may be a great company but to declare it is a growth company is oxymoronic given its massive capitalization.
In market sense, typically when everyone believes something the inverse often occurs. I ask what are the odds there will be a similar picture of the infamous 1948 headlines declaring “Dewey defeats Truman.”
2020 has been the year of the unexpected. Numerous Black Swan events have occurred. Against this backdrop suggesting any of the above is not as preposterous as some might think.
Commenting about large bank 3Q earnings, the top five US financial firms have indicated that they have fully reserved and have perhaps over reserved for loan losses from COVID. Bank profits are starting to resemble life before COVID—just down 12% from the level reported a year earlier– but the market does not agree the industry issues have passed as the sector is down 27% YTD. The only sector that is performing worse than the financials is energy.
During the 2008-09 financial crisis, it took two years before earnings climbed back to 80% of pre financial crisis levels yet the shares more than quadrupled during that period.
In my view this is yet another disconnect in the markets. Change is the only inevitable aspect of life but as already written change will occur only when all believe the odds of such are null.
Last night the foreign markets were down. London was down 1.75%, Paris down 2.15% and Frankfurt down 2.65%. China was down 0.26%, Japan down 0.51% and Hang Sang down 2.06%.
The Dow should open moderately lower on virus concerns and stimulus impasse. Perhaps what may be different in this decline is the “proverbial stay at home stocks” are leading the decline as the NASDAQ 100 futures are off about 2% and Dow futures off only 0.75%. The 10-year is up 7/32 to yield 0.71%.